– Your credit score determines a lot more than you’d think: Not only does it impact whether you qualify for loans and what terms you’ll get, but it can also affect your ability to rent an apartment, get car insurance or even find a job. Here are five easy steps to building up your credit so that down the line you can find a personal, auto or home loan on reasonable terms.
1. Understand what goes into your credit score
Your credit score, or FICO score, is a number ranging from 300 (worst) to 850 (perfect), but when you first start out, you don’t have bad credit, you just have no credit. This means it’s easier to qualify for a loan than someone who’s missed payments or gone bankrupt. So what factors make up your credit score, anyway?
1. Payment History (35% of your FICO score): Making on-time payments boosts your credit score; missing payments hurts it. Recent history is weighted more heavily, so if you’ve had a spotty history in the past, take comfort in the greater weight given to current good behavior.
2. Amounts Owed (30% of your FICO score): Debt can hurt your score, though installment loans (like student loans) can help, as long as you make on-time payments. Your debt utilization ratio (the amount of credit you’re using, compared to the amount available) is also important. You should only use about 33% of your available credit.
3. Length of Credit History (15% of your FICO score): Is your credit history mostly comprised of just-opened accounts? Lenders want to see an established history of good standing in accounts, so the longer you keep them open, the better.
4. New Credit (10% of your FICO score): Your score also reflects recent credit acquisitions and inquiries into your credit score. Don’t apply for too many new lines of credit in a short period of time, as this raises red flags.
5. Types of credit used (10% of your FICO score): You’ll want to diversify the types of credit you have – department store credit cards, regular credit cards, home equity lines of credit, student loans and so on.
2. Keep your existing accounts open
Remember that both your overall credit limit and account age affect your FICO score. If you have credit cards, keep them open even if you don’t use them; they’ll lower your debt utilization ratio and raise your average account age. If your card has an annual fee, call the card company and either ask them to waive the fee or downgrade to a no-fee version.
3. Apply for a secured credit card
If you can’t qualify for a credit card (it may be difficult with no credit history), consider getting a secured credit card. These cards require you to make an initial upfront deposit, usually equal to your line of credit, that’s stored in a savings account for as long as the account is open. You can’t use this to pay off your debt; instead, it’s held as collateral so that the bank feels more comfortable about making the loan. Once you’ve established a history of on-time payments, you can “graduate” to an unsecured credit card and get your deposit back.
4. Check your credit report and score
It’s important to check your credit score and history to make sure there aren’t any inaccuracies. This is particularly important if you’ve recently changed your name – you don’t want to lose your existing history.
You’re entitled to check your credit report once a year for free. While the law entitles you to your credit report, you need some fancy footwork to get your credit score for free. The easiest way to do this is to sign up for a credit monitoring service that sends you your credit score, then cancel during the trial period to avoid paying a $10 - $20 monthly fee. Remain vigilant about your credit monitoring, taking the time to go through your credit report once a year.
5. Understand why you’re denied a loan
If, for whatever reason, you apply for a loan and are either denied or offered a higher interest rate than usual, you have a right to know exactly why. If a potential lender, landlord or employer – anyone who makes a negative decision based on your credit score – turns you down, you have the right to request not only your credit score, but information on exactly where you fell short. It’s not enough for them to say, “Your credit wasn’t good enough.” They’ll have to tell you that you had a high debt utilization ratio, or your credit history was too short – the nitty gritty.
Most of all, don’t get discouraged! Building a credit history may seem daunting, but it’ll help you throughout your life.
Anisha Sekar is the VP of Credit and Debit Cards at NerdWallet.com, a consumer-focused decision-making website.